Nash's Twin Sisters Story, Explained Simply

Picture two sisters, born the same day, raised in the same house, with the same job and the same pay. Each one sets aside the same amount every year. Each one buys the same cars at the same times. Each one pays herself back with the same discipline. Forty years later, one of them has far more money than the other. How can that happen, when they did everything the same?

That is the question at the heart of the twin sisters story, one of the most familiar examples in Nelson Nash's book, Becoming Your Own Banker®. Nash built it to answer the people who told him that a savings account or a bank certificate could do everything a life insurance policy could do. His answer was a story, told with numbers, about two sisters who changed only one thing: where their money waited between purchases.

This guide tells the story in plain words, walks through Nash's figures, and explains what he was trying to teach. It also shows what changes when you bring the story to Canada today, and what the story does not prove. It is written by someone who is paid by insurer commissions when a policy is bought, which is worth knowing as you read.

What is the twin sisters story?

It is Nash's example of two sisters who save the same money, buy the same cars and pay themselves back the same way. One keeps her money in bank certificates, the other in a dividend-paying whole life policy. The certificate sister leads early, then falls behind for good around year 14.

The story sits in Part III of the book, on pages 41 to 47 of the fifth edition. Nash starts with a simple problem: how does a person pay for a car every four years across a working life of 44 years? He lists five methods and gives each a letter.

• Method A: lease the car. In his figures, the most expensive way, about $175,000 over 44 years.
• Method B: borrow from a lender. Payments of $260 a month for 48 months on each car, about $137,280 in total.
• Method C: pay cash. Buy a new car every four years with savings, eleven cars in all, for about $116,050.
• Method D: build savings first in bank certificates, then buy the cars from that pool and pay it back.
• Method E: build capital first in a dividend-paying whole life policy, then buy the cars from that pool and pay it back.

Nash noticed something about the first three. On a graph, they look almost the same. Each one is a stream of car payments that leaves the family and never comes back. Whether the money goes to a leasing firm, a finance company or the car dealer, it is gone. The twin sisters are Methods D and E. They are the two methods where the money comes back.

Who are the two sisters, and what do they do?

Both sisters set aside $5,000 a year for seven years before buying anything. Then each one takes $10,550 from her pool for a car and pays $3,030 a year back into it for four years. They repeat this for every car. Only the place where the money waits is different.

Nash calls them the certificate sister and the insurance sister. Here is what each one does, step by step, in his example.

1. Seven years of saving first. Each sister puts $5,000 a year aside for seven years. Nash calls this the time to build capital before using it. Neither sister touches the money in these years.
2. The first car. In year eight, each sister needs about $10,550 to buy a car, after the trade-in. She takes it from her own pool instead of borrowing from a finance company.
3. Paying herself back. For the next four years, each sister puts $3,030 a year back into her pool. That is close to what a finance company would have charged her. She is acting as an honest lender to herself.
4. The next car, and the next. Every four years, she takes money for the next car and starts paying it back again. Over 44 years, she buys eleven cars this way.

The certificate sister keeps her pool in bank certificates of deposit, what Canadians would call GICs. In Nash's example they pay 5.5% a year. Because the interest is taxed every year, at about 30% in his assumption, she keeps about 4% after tax. After seven years, she has $41,071.13.

The insurance sister pays her $5,000 a year as premiums on a high-premium, dividend-paying whole life policy from a mutual insurer. Her pool is the cash value of the policy. When she needs money for a car, Nash has her withdraw from the policy. Her $3,030 a year of car payments go back in as premium.

So the twins do the same things, with the same dollars, at the same times. The only difference is where the money sits while it waits.

Why does the insurance sister look like she is losing at first?

Because a new policy costs money up front. After one year the certificate sister has $5,200 and the insurance sister has $1,933 of cash value. Nash said every new business has a time lag before profits begin, and a policy is no different.

Nash imagined the sisters comparing notes at the end of each year. After year one, the certificate sister has put in $5,000 and has $5,200 after tax. The insurance sister has also put in $5,000, but her cash value is only $1,933. The certificate sister is not shy about it. She tells her twin that buying whole life insurance was a poor decision.

The second year looks no better. The certificate sister has $10,608. The insurance sister has $6,359. On paper, she is well behind, and it will stay that way for years.

Nash did not hide this. He asked his readers to think about any new business. Someone who opens a store buys land, builds a building, fills the shelves and trains the staff before the first customer walks in. Nobody calls that a failure. It is the cost of starting. A new policy is the same: in its early years, the premium pays for insurance protection and for the costs of putting the contract in place, including the agent's commission, and the cash value starts small.

Elsewhere in the book, Nash used a picture from physics. Heat a pail of water to 210 degrees Fahrenheit and all you have is very hot water. Two more degrees, and you have steam that can drive an engine. A lot of heat goes in before anything dramatic happens. The early years of the insurance sister's policy are those first 210 degrees.

What happens at year 14 and after?

Around year 14, the two sisters are even. From then on, the insurance sister pulls ahead and never falls back in Nash's table. Her policy earns interest and dividends inside the contract, while her sister pays tax on her interest every single year.

Nash's table shows the certificate sister ahead through year 14. Then the lines cross. The certificate sister keeps growing, but more slowly, and the gap widens every year after that.

Nash gave three reasons for the change.

• Two kinds of growth. A participating policy grows by the interest built into its guaranteed values and by the dividends the insurer may declare. The certificate earns only its interest.
• Tax each year, or not. The certificate sister pays tax on her interest every year, so part of her growth leaves every year. The growth inside the insurance sister's policy is not taxed each year while it stays in the contract.
• The early costs are behind her. Once the policy's start-up costs have been absorbed, more of each dollar of premium goes to building value.

Nash described the result as flying with a permanent tailwind instead of a permanent headwind. The certificate sister is not doing anything wrong. She is simply flying against the wind for the whole trip.

There is one more difference that the table does not show in dollars. The whole time, from the first premium, the insurance sister's family was protected by a death benefit. If she had died in year three, her family would have received far more than she had paid in. If her twin had died in year three, her family would have received her account balance and nothing more.

How does the story end?

When the cars are done, each sister starts taking $50,000 a year. In Nash's table, the certificate sister runs out in five years and eight months. The insurance sister keeps drawing dividends, and her death benefit stays above $1,000,000.

After her last car, the certificate sister has about $259,000 in Nash's table. The insurance sister's policy holds about $964,000 of cash value. Both of them put exactly the same money in, and both took exactly the same money out for their cars.

Then each sister begins to take $50,000 a year to live on. For the certificate sister, the arithmetic is hard. Her account cannot earn enough to keep up with the withdrawals, and it is empty in five years and eight months.

The insurance sister, in Nash's example, takes her $50,000 a year as dividends, while her cash value keeps rising. By age 85, she has taken $650,000 in this way, and her net death benefit is about $1,365,057. In his figures, it never falls below $1,000,000, however long she lives.

These numbers come from an American policy illustration from the 1990s, with the dividend scale, interest rates and tax rules of that time and place. They were never guaranteed, and nobody can promise them today. Nash used them to show a direction, not to promise a result.

What was Nash actually trying to teach?

Nash was not saying that one sister was smart and the other foolish. Both did well, because both paid themselves back. His point was that where your money waits changes the result, and that the person who plays all the roles keeps more of the reward.

Nash liked to say that there are four characters in any financial story. There is the depositor, who leaves money somewhere. There is the borrower, who uses money. There is the lender, who controls a pool of money and sets the terms. And there is the owner, who receives the profit the lender makes.

Look at the twins through that lens.

• The certificate sister is a depositor and a borrower. She deposits her money with a financial institution and uses her own savings to buy cars. The institution, and its owners, keep the profit from lending her deposits to others. She receives her interest, minus tax.
• The insurance sister plays more of the roles. She is the policy owner, she decides when to use her capital and how to repay it, and, in a mutual insurer, participating policy owners share in the surplus through dividends that the insurer may declare.

Nash asked his readers a simple question about the gap between the two sisters at the end. What was the reward for taking on more of the roles? In his table, it was the difference between about $964,000 and about $259,000.

There is a second lesson hidden in the first. Both sisters beat Methods A, B and C by a wide margin. They did it because they paid themselves back, every time, at the rate a lender would have charged. Nash called taking without repaying "stealing the peas", after his story of a grocer who takes food off his own shelves without paying. A pool that is used and never refilled cannot buy the next car. The twin sisters story is as much about that habit as it is about life insurance.

Why did Nash leave policy loans out of the story?

Because many readers were uneasy about the word "loan". Nash removed loans to show that the policy's advantage did not depend on borrowing. In a later note, he said he would have recommended policy loans for the cars, with a plan to repay them.

Nash kept hearing the same objection: why borrow against a policy when you can simply save in a certificate and use your own money? So he built an example with no borrowing at all. The insurance sister only withdraws and repays. Even so, her result is far ahead.

Later editions of the book add a short note to the example. In it, Nash says that he would have recommended policy loans rather than withdrawals to buy the cars, and that he expected the result to be stronger still for the insurance sister. He also repeats the two firm rules he gave for the whole approach: do not be afraid to build capital, and never take a policy loan without a plan to pay it back.

In Canada, a policy loan is an advance from the insurer, secured by the cash value, with interest owed to the insurer. The Autorité des marchés financiers describes it that way on its page about accessing the cash surrender value without cancelling your insurance. It is not free money. It is capital with a price, and the price has to be part of the plan.

What are the lessons most readers miss?

Most readers remember the crossover at year 14. Fewer notice three quieter lessons: both sisters won against the usual ways of paying for cars, the repayment habit did most of the work, and the insurance sister had life insurance the whole time.

First, both sisters won. Compared with leasing, borrowing from a finance company or paying cash, both twins ended their working lives with a large pool of capital. The certificate sister was not the loser of the story. She was the second winner.

Second, the habit mattered more than the product. Both sisters paid themselves back as if they owed a finance company. If either had taken money for a car and never put it back, her pool would have shrunk with every car until it was gone. The product changed the size of the result. The habit made a result possible at all.

Third, the insurance was real. The insurance sister's death benefit was there from the first year. It is easy to read the table as a race between two savings accounts, but only one of the sisters had protected her family along the way.

And a fourth one, about patience. The insurance sister spent years hearing that she had made a mistake. What she needed most was patience. A reader who cannot tolerate being behind for a decade should know that before starting.

What does the story look like in Canada today?

The shape of the story carries over, but the numbers do not. In Canada, GIC interest is taxed every year. Growth inside an exempt policy is not taxed each year, but withdrawals, cash dividends and loans can be taxable above the policy's adjusted cost basis.

Nash wrote about American certificates, American policies and American tax rules. Here is how each piece of the story translates for a Canadian family.

• The certificate sister holds GICs. The Canada Revenue Agency explains on its page about line 12100, interest and other investment income that interest on a GIC is reported for each year it is earned, even before the GIC matures. That is the headwind Nash described. A GIC held in a tax-free savings account would change this part of the story.
• The insurance sister holds an exempt policy. Growth inside a policy that meets the exempt test is not taxed each year while it stays in the contract. The test also limits how much money a policy can hold compared with its coverage.
• Taking money out can be taxed. Under section 148 of the Income Tax Act, a partial surrender, a policy dividend paid in cash and a policy loan are dispositions. The amount above the policy's adjusted cost basis is included in income. Nash's withdrawals would therefore be taxed differently in Canada, and a loan above the adjusted cost basis can create income too.
• Rates and dividend scales are different. A 5.5% certificate and the dividend scale of a 1990s American mutual insurer tell us nothing about the rates a Canadian family will see. Only a current illustration from a Canadian insurer, read with its guaranteed and non-guaranteed columns, can show your own numbers.
• Protection is different. Eligible deposits at a member institution are covered by the Canada Deposit Insurance Corporation within its limits. Life insurers authorized in Canada belong to Assuris, which protects part of the promised values if an insurer fails. Neither one is the same promise as the other.

So the Canadian version of the story is not a copy of Nash's table. It is the same question, asked with Canadian numbers: where should money that you will use again and again wait between uses?

What the story does not prove

The story does not prove that a policy will beat a GIC for your family. It does not guarantee any dividend, any crossover year or any final amount. It shows how two different places for money behave over a long time, under one set of assumptions.

Keep these limits in view when you read Nash's table or any version of it.

• Dividends are not guaranteed. The insurance sister's result depends on dividends that the insurer declares each year. A lower dividend scale would push the crossover later and shrink the gap.
• Early years cost money. If the insurance sister had needed her money in year three, she would have found far less than she had paid in. A policy cancelled early can return less than the premiums paid.
• The products do different jobs. A GIC is a deposit. A participating whole life policy is life insurance, with a death benefit, costs of insurance and a long commitment. Comparing them only on their balances leaves out what each one is for.
• One set of assumptions is not a forecast. Nash's figures show one path. A different age, health, insurer, tax rate or interest rate would draw a different path.

None of this takes away the lesson. It keeps the lesson honest.

How can a family use the lesson of the twin sisters?

Start with the habit, not the product. Decide where your repeat purchases will be financed from, give yourself time to build capital before using it, and pay yourself back on a schedule, as a lender would require. Then decide where that capital should wait.

Here is a short routine that follows the story's logic.

1. List your repeat purchases. Cars, appliances, a roof every twenty years, equipment for a small business. These are the purchases the twins were planning for.
2. Look at how you pay for them now. Lease, loan or cash. Add up what left your household for these purchases over the last five years. That is your own Method A, B or C.
3. Build before you use. Both sisters waited seven years. Your number may be different, but the principle holds: capital has to exist before it can finance anything. The guide on capitalization before use explains why.
4. Write the repayment plan before you take the money. Decide the payment, the schedule and the account it goes back to. Treat it as seriously as a payment to a finance company.
5. Then decide where the money waits. A savings account, a GIC, a TFSA or a participating whole life policy each has different rules, taxes, costs and protections. A policy belongs in the plan only when your family has a lasting need for life insurance.

The twins teach one more thing: time is the ingredient nobody can add later. The insurance sister's advantage came from decades, not from a clever trick.

What should you ask before acting on this story?

Ask for your own numbers, not Nash's. Ask the insurer about guaranteed and non-guaranteed values and the crossover year. Ask your accountant about tax on withdrawals, dividends and loans. And ask yourself whether you can stay patient through the early years.

Questions for yourself:

1. Which purchases do I make again and again, and how do I pay for them now?
2. Could I set money aside for several years without touching it?
3. Would I pay myself back on a schedule, even when nobody is asking?
4. Do I have a lasting need for life insurance, apart from this idea?

Questions for the insurer or your representative:

1. In which year does the guaranteed cash value exceed the premiums paid, and in which year on the current dividend scale?
2. How would a withdrawal, a cash dividend or a policy loan affect the policy?
3. What is the current loan rate, and how can it change?

Questions for your accountant:

1. What is my policy's adjusted cost basis, and when would a withdrawal or loan create taxable income?
2. How is the interest on my GICs taxed each year compared with growth inside an exempt policy?

What this page will not tell you

It will not tell you what your own policy or GIC would earn, because Nash's figures are American and decades old, and your rates, taxes and dividends will be different. It will not tell you that a policy is the right place for your family's money, because that depends on your need for life insurance, your budget and your patience. And it will not repeat Nash's table as if it were a promise. It is a story with numbers, told to change how you think about where money waits.

Who this does not suit

The lesson of the twin sisters, pay yourself back and let capital build, suits almost anyone. Acting on it with a life insurance policy does not. If you may need the money in the first several years, if expensive debt is already straining your budget, if you have no emergency reserve, or if you have no real need for permanent life insurance, other steps usually come first. And if being behind your twin for fourteen years would be more than you could bear, the certificate sister's path may simply suit you better, as long as you pay yourself back the way she did.